6 minutes
Housing staff in high performance headquarters facilities is more critical today than ever. High performance is now defined in two ways: a work environment that motivates staff to perform at their highest level and truly live the credit union’s brand, and a real estate strategy that provides the lowest operating cost over the long term.
The key to accomplishing these goals is to create a sound and creative real estate and occupancy strategy with these seven critical components:
1. Consider the long term.
Short-term branching strategies often favor leasing, which typically costs less than owning for the first seven years of a 10-year program. However, 20-year projections should be used for scenario development, as it provides a rational timeframe of occupancy use.
Most financial institutions occupy the same headquarters for more than 10 years. Even when the credit union owns the building, short-term thinking can be dangerous. For example, a 10-year projection may show the need for a 50,000-square-foot building at a cost of $9 million. This looks realistic in terms of current assets. But what happens at the end of 10 years? Should the CU sell the building and relocate? Or, would it be better to have purchased sufficient land to accommodate future expansion (and sell it if it’s not needed), or construct a building to meet 20-year needs (and lease to others in the meantime). The financial significance will be illustrated later in this article.
2. Look at business projections when making facility decisions.
Headquarters occupancy is naturally driven by a credit union’s business plan and performance expectations. Translating performance into physical space for the future should be done in two ways. First, interview senior and individual department managers to find out how each department is likely to grow or shrink in the long and short term. Most department managers will have difficulty projecting more than a few years out and will have to be encouraged to look past three years to 10 years. Senior management will need to be certain they have clearly shared their vision for the future and then check each department manager’s numbers to ensure they have not over or understated their needs. These numbers will then be extrapolated to 20 years.
Second, staffing needs should be projected out 20 years. A variety of growth rates can be applied to study possible scenarios, factoring in inflation and efficiencies of scale over time. These projections, in combination with general office space needs, are then used to develop the 20-year space needs projections, in five-year increments.
3. Be sure to consider employee expectations for the future workplace.
Employees’ workspace needs are changing. For example, in some cases, telecommuting is becoming a desirable option for at least some work hours. To see how this impacts headquarters space planning, CUs can consider how many days a week and how many staff members may work from home. While telecommuting may not provide short-term space savings, it does provide a highly desirable employee benefit in markets with long commutes and for staff who need more at-home time for personal reasons.
On the other hand, new headquarters facilities also need to offer work/play and collaboration areas that match a credit union’s brand with employees’ work and socialization styles. These can require additional space. For example, the typical small coffee area may need to be slightly bigger to provide a space for a counter where staff from different departments can develop an idea, and the lunch space made need to be larger to make room for a game table.
4. Dig in deep to the question of own vs. lease.
When a credit union is deciding whether to own or lease its headquarters, it must consider how the space will support its short- and long-term business goals, and how the building can function as an investment. There are often many options to consider, including retaining the existing building and
- expanding it to meet long-term needs,
- leasing future space when needed;
- selling it to a developer, then leasing it back; and
- housing some staff in another location.
The credit union also may be able to purchase an existing building and remodel it, or move staff to space vacated through branch downsizing.
There are likely many other options based on your credit union’s current location, market conditions, building availability and other factors. Each option generates significant difference in short- and long-term cost and performance of your organization.
Here are the scenario options developed for a West coast credit union. The seven occupancy scenarios express the major options and cover 20 years of occupancy. The first cost is our calculation working with a commercial real estate firm and large contractor. The second column, titled “Impact on Income Statement,” was generated by the credit union’s chief financial officer. You will note option six (ownership) at $25.4 million—which the credit union selected—is significantly less than the full lease option of $68.2 million over 20 years. Which options would you and your board be most likely to pick?
5. Answer these questions before settling on your headquarters’ location.
Location has huge impact on cost and use. Following are a few questions to consider: Should you locate your headquarters where a branch needs to be placed? The answer is most often no, as retail land is much more expensive than most headquarters land and may not be convenient for commuting staff. On the other hand, an existing building in a retail area may be less costly than building a new facility on less costly land. When considering likely costs, here are some key questions to answer:
- Is the site adjacent to a transportation hub so commuting time is as low as possible?
- Are there staff amenities in the area, such as day care, restaurants, and grocery stores?
- Does the site provide significant market visibility?
- Are the adjacent properties desirable?
- What is the long-term economic projection for the surrounding market area?
- Is the location in an area with high lease demand?
- Is there sufficient land to meet your long-term needs?
- Are there adjacent site problems that will be costly to mitigate?
- Are there surrounding characteristics that could limit accessibility?
- Is there sufficient road infrastructure from major residential areas?
6. Make your Realtor® a partner.
Realtors are typically smart, market knowledgeable and connected in the business community. Like your strategic planning consultant and architect, they can help you accomplish an important and expensive goal. Do have your planning consultant balance the Realtors’ input so you do not lose site of your long-term goals in the romance of real estate.
7. Present the strategy to the board.
Headquarters occupancy is one of the board’s biggest decisions in terms of financial, performance and employee impact. So, the consultants you use and the process you employ are important. The board needs confidence that the analysis was solid, the resulting cost figure is real and that the credit union can afford it. Often board members were involved in the last headquarters decision, making it important to respect their past decisions within the context of the time so they are not made to look foolish.
A few board members may want to contest the planning projections as an exercise in good stewardship, so have on hand the necessary information to back up every recommendation.
In the end, headquarters decisions are all about having a solid business case. What facility do we need to support our strategic business plan and can we afford it? Proper headquarters planning can substantially increase bottom line performance while creating an environment where staff can truly live your brand. Best of luck with your new headquarters!
Paul Seibert, CMC
